Judge Upholds State Position On Pension Tax

February 14, 1990|By BOB KEMPER Staff Writer

A Circuit judge ruled Tuesday that the state does not have to refund $400 million in taxes to federal retirees, saying the state's levy on their pensions "was not erroneous or improper at the time it was assessed."

Representatives of retiree groups that brought the lawsuit said the decision will be appealed.

"It's a matter of principle to us," said Col. John Chapman, president of the Military Retirees Taxpayers Association. "The legislature has been treating me as a second-class citizen."

Attorney General Mary Sue Terry said the ruling shows that the state "acted fairly and in accordance with the law."

The Virginia ruling is contrary to those of courts in four other states with the same problem. Judges in Missouri, South Carolina, Arkansas and Arizona have already ruled in favor of retirees, forcing states to offer refunds, Terry said. All but the Missouri case are being appealed.

The U.S. Supreme Court ruled early last year that states must tax all retirees equally - whether they worked for federal, state or local governments. Virginia taxed the pensions of its 200,000 federal retirees, but not the others.

The General Assembly met in special session last April to ham mer out a package of tax breaks for all retirees to end the unequal treatment, but did not approve refunds. The federal retirees then filed suit to retrieve taxes they already paid.

The statue of limitations allows the federal retirees to seek refunds only from 1985 to 1988, though the state government has taxed federal pensions while exempting its own retirees since 1942.

"We will definitely appeal this," said Chapman of the military retirees' group, which he said has 15,000 members helping to pay for the court challenge.

Chapman said the judge's ruling "may be a partially political decision" since state officials have been saying for months that the $400 million they would have to pay the retirees would cripple their budget.

"We tried this case as we would try another," Terry said. While the state argued in court that the money would have a "significant fiscal impact," Terry said she's certain it would have been a secondary consideration in the case.

"It was disappointing, naturally, as well as a big surprise," said Henry W. Harper, of the Virginia Federation of Chapters of the National Association of Retired Federal Employees.

Harper said his group's executive committee would meet today or tomorrow to decide whether to appeal, although it seems certain it will. "It's been planned on from the beginning," he said.

Harper said his group is using the same legal arguments and lawyer, Michael J. Kator of Washington, D.C., that won in Missouri. "That's why I'm surprised," he said.

Terry said it could take a year before an appeal hearing would come before the state Supreme Court. The court would then have up to a year to render a decision.

The judge's decision was welcome news to the General Assembly, which is already considering budget cuts to cope with a worsening financial crisis.

Laura Dillard, spokeswoman for Gov. L. Douglas Wilder, said the decision will not affect Wilder's proposals to cut spending and to build a reserve fund in a two-year, $26 billion budget.

The judge's decision came at about the same time the Senate was approving an overhaul of the tax breaks they worked out for pensioners in April. The new package of tax breaks, co-sponsored by Andrews, will reduce some of the breaks and save the state about $110 million over two years.